A fragile reprieve for the eurozone
The desk perceives a fragile economic recovery in the eurozone, spurred primarily by declining oil prices and their moderating effect on inflation, as discussed in the commentary from ING Think. Lower energy costs are expected to improve household finances and bolster business confidence, creating a conducive environment for growth unless geopolitical tensions in the Middle East escalate further. A key observation from the research highlights the region’s vulnerability, citing that renewed tensions could quickly derail the progress if no substantial negotiations occur. Per the full note, the backdrop of improved economic sentiment and suppressed inflation expectations provides a foundation for potential growth in the latter half of the year, potentially influencing currency pair movements such as EUR/USD.
What the desk is arguing
The desk frames this as a cautious optimism surrounding the eurozone's economic trajectory, especially in light of favorable shifts in energy prices. Per the full note, the easing of oil prices is both a boost for household finances and an opportunity for economic recovery, contingent on the geopolitical landscape.
Supporting this outlook, the research points to a decline in inflation rates as a direct consequence of lower oil prices, suggesting that inflation expectations are returning to sustainable levels. Such dynamics could enable the European Central Bank to navigate a careful path in monetary policy in the coming months.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with firm targets varying across expectations: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's interpretation aligns closely with jpmorgan, who see the euro strengthening against the dollar, sitting at the upper end of the spectrum due to anticipated growth narratives bolstered by favorable energy dynamics.
How other firms see it
Generally, jpmorgan and others share similar views regarding a bullish outlook for the eurozone with expectations for a gradual recovery. In contrast, bofa holds a more conservative stance, indicating a more precarious outlook for the euro against the dollar.
This perspective intertwines with broader factors such as ECB policy decisions and oil price fluctuations, underscoring the importance of geopolitical developments in shaping future currency actions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lower oil prices are improving household and business financials in the eurozone.
- 02Geopolitical tensions, especially in the Middle East, remain a significant risk factor for the eurozone's recovery.
- 03Inflation pressures are easing, aligning with potential ECB policy adjustments.
- 04The euro could strengthen against the dollar if energy prices remain stable and growth picks up.
Market implications
Watch for EUR/USD's reaction around the 1.075 level, as sustained energy price trends and easing geopolitical risk could provide upward momentum. Market positioning may also shift as sentiment indicators improve.
Risks to this view
Escalation of Middle Eastern tensions or a failure to secure stable energy supplies would likely invalidate the current bullish outlook for the euro, potentially reversing the progress made in household confidence and inflation stabilization.
Articles A fragile reprieve for the eurozone Published 11:07 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download As a net energy importer, lower oil prices are clearly favourable for the eurozone. A Goldilocks scenario – where inflation moderates and growth picks up again – remains the baseline, although renewed Middle East tensions have increased the risks around that outlook Bert Colijn and Carsten Brzeski Nice, France: Falling oil prices have given the eurozone a welcome economic boost Lower oil prices have offered a reprieve The Memorandum of Understanding between the US and Iran gave the eurozone a reprieve from soaring energy prices, as flows through the Strait of Hormuz resumed. However, recent tensions have again highlighted how fragile the situation remains.
There is still no deal between the parties, any negotiations continue to be clouded in uncertainty and new escalations can happen almost any time. Economic growth in the second quarter was likely sluggish as geopolitical tensions and a surge in war-related costs weighed on output, even though some industries may have benefited from Asian competitors being hit harder by the disruption to trade through the Persian Gulf. Sentiment indicators started to improve cautiously ahead of the MoU, and growth could pick up over the second half of the year if energy prices remain contained and the Middle East situation does not escalate further.
Lower energy prices have improved household finances, reduced geopolitical uncertainty has supported business confidence, and longer-term fiscal stimulus – particularly through German defence and infrastructure spending – is finally beginning to feed through to the economy. Inflation concerns eased as oil prices returned to pre-war levels Declining oil prices in June had a direct effect on inflation expectations. Inflation fell as energy and services inflation both ticked down.
Most relevant to the inflation outlook is whether businesses will now become more reluctant to push higher input costs through to customers. Initial surveys have suggested that this is the case, although we do still expect elevated core inflation for the quarters ahead. Less action potentially needed from the ECB If headline inflation moderates further from here, the reasons for the European Central Bank to hike rates forcefully will fade.
The central bank should therefore be wary of repeating the mistakes of previous commodity shocks and having to quickly reverse an overly aggressive tightening cycle. We think it will sit out the July meeting to see how the situation in the Middle East evolves. But with higher core inflation, the central bank could hike once more in September if inflation risks still provide reason for concern. 3 things to watch in the second half of the year With energy prices down from their recent highs – despite this week's uptick – a second rate hike from the European Central Bank might no longer be necessary.
Yet the Bank could still feel inclined to deliver it. Balancing what the eurozone economy really needs against the preservation of its own credibility may prove to be the ECB's main challenge in the second half of the year. The labour market will also remain firmly in focus.
Having been remarkably resilient across much of the eurozone, it now faces new challenges. The growing adoption of AI could weigh on labour demand in some sectors, reducing wage pressures and adding to the broader disinflationary forces already at work. The second half of the year should also provide more clarity on whether Europe is actually able to deliver on its promises and pick up where it left off when the war in the Middle East started.
The February informal leaders’ summit presented big plans to improve the single market, energy policies and capital markets union. Making real progress on these issues could be the real 'global euro' moment. Monthly Update Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Bert Colijn Senior Economist, Eurozone Bert Colijn is a Senior Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the eurozone.
Prior to this, he worked at The Conference Board, a… Carsten Brzeski Global Head of Macro Carsten Brzeski is the Global Head of Macro for ING Research. Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow… In this article Lower oil prices have offered a reprieve Inflation concerns eased as oil prices returned to pre-war levels Less action potentially needed from the ECB 3 things to watch in the second half of the year
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